Inflation in Pakistan is expected to
accelerate to 13.5 per cent in the current fiscal year 2010-11 as massive summer
floods push up prices for food and other staples, the IMF said in its country
report. Prior to the disaster, the IMF had projected average inflation for the
current fiscal year 2010-11 at 11.5 per cent, slightly below the 11.7 per cent
seen last year.

Analysts believe that the government
borrowing from the central bank is expected to mount in the wake of meeting
heavy flood-related expenditures, which could further heat up fiscal and
inflationary pressures. Inflation is forecast to rise further owing to hike in
the power tariffs and expansionary fiscal policy.

Despite being an agricultural country,
Pakistan has been importing food items from other countries. The government paid
no attention to the development of agriculture sector. The population has also
increased 24 per cent in the last ten years and agriculture product has
increased only five per cent.

Out of the country's total cultivated
area of 52.4 million acres, where wheat, cotton, rice and sugarcane are the
major crops contributing seven per cent of GDP, so far 0.1 million acres of
cotton crop have already been wiped out in Khyber-Pakhtunkhwa and Punjab by the
worst floods, which are now ravaging agriculture in Sindh province. The recent
floods could cause shortage of food commodities in future. Destruction of entire
villages and towns, infrastructure, livestock and crops, in addition to
large-scale human displacement, necessitates urgent provision of supplies.

If the government does not chalk out a
comprehensive strategy for this issue on urgent basis, worst food crisis in
likely in the country, APP reported, citing Dr Shahid Hasan Sidiqui, an
agriculture expert. The experts advise that more barren land should be used for
cultivation to control the possible shortage of food.

The potential loss in the country's
agriculture output could cause a rise in already high inflation, while fiscal
pressure could mount due to reconstruction, subsidies, and relief efforts. The
full impact of flood has yet to be calculated, which requires hundreds of
billions of rupees to mitigate the consequences facing at least four millions
people in the country.

Inflation rose to a four-month high in
August to 13.23 per cent as the country's devastating floods forced food prices
to increase, according to Federal Bureau of Statistics. The annual inflationary
growth in August is the highest since April, when it was 13.26 per cent. Food
prices in August rose 15.6 per cent from a year earlier.

The inflation, which was 12 per cent in
2007-08, rose to 20.8 per cent in 2008-9. It came down to 11.7 per cent in
2009-10. The security situation and re-payment of loans have been the main
factors contributing to the rise in inflation.

Sensitive price indicator (SPI)
inflation for the week ended on September 30 for the lowest income group up to
Rs3,000 has registered a nominal increase of 0.02 per cent over the previous
week, according to the Federal Bureau of Statistics (FBS). The SPI for the week
under review in the lowest income group was recorded at 285.78 points against
285.72 points registered during the previous week. The SPI for the combined
group registered a growth of 0.08 per cent as it went up from 272.16 points in
the previous week to 272.37 points during the week under review. The SPI for the
combined group during the week under review witnessed an increase of 19.44 per
cent, against the corresponding week last year.

Pakistan's central bank has indicated
that its tight monetary policy will continue in the current fiscal year 2010-11
(July-June) after the bank on September 29 raised its key policy rate to a
17-month high of 13.5 per cent from 13 per cent on concerns of high inflation.
The analysts project the discount rate to reach 14.5 percent from 13.5 percent
by the end of current fiscal year given the current outlook on inflation and the
fiscal deficit.

Newly appointed Pakistan's central bank
chief Shahid Kardar raised the bank's benchmark interest rate by 50 basis points
to 13.5 per cent, as he announced his first monetary policy for October and
November last month. This was for the second time in two months of the current
fiscal year 2010-11 that the country's central bank increased the discount rate
to control inflation after the country's most devastating floods washed away
crops, roads, and bridges. Analysts believe that the central bank had no option
but to continue its tight monetary stance, given the country's uncertain
economic outlook with persistent inflationary pressures especially after the
floods.

Poor fiscal position and difficult
monetary indicators actually forced the central bank to tighten its stance on
the monetary tightening.

'The monetary policy stance is formed
by the consideration that the impact of continued inflation is substantial and
felt by the entire economy,' the State Bank of Pakistan (SBP) said in its
monetary policy statement on Wednesday. 'A tightening of the stance is thus
called for in full recognition that the difficulty to contain fiscal deficit has
resulted in the private sector bearing the full brunt of such an adjustment.'

Critics say that the hike in interest
rate will act as an upshot to inflation and prices of consumer goods will
multiply owing to increased cost of manufacturing and doing business.
Businesspersons call it anti-industry move of the central bank, which has given
another blow to the ailing industry by raising half a percent bank rate and fear
that the raise in interest rate would bring the remaining industries on the
verge of collapse.

The country's economic outlook has
deteriorated sharply as a result of the floods. The government estimates the
floods damaged $3.3 billion of crops, causing food shortages.

Pakistan will harvest 4.4 million
metric tonnes of rice in the 12 months starting November 1, down 35 per cent
from the previous year, Bloomberg reported citing a report by a unit of the US
Department of Agriculture.

The task of disciplining the
government's spending will be the hardest challenge for the new Governor Kardar
given the government's increasing needs to pay the bill to the tune of hundreds
of billions of rupees for post-flood reconstruction and its inability to raise
enough tax revenues and foreign assistance to support its budget. Slow economic
growth and high inflation require high degree of skills to maintain balance for
future of economy in the country.